This article presents a Q&A with academic researchers who have conducted a study on people who simultaneously hold CFO and COO positions. The conversation has been edited for length and clarity. Their findings were published in the Journal of Management Accounting Research in 2019.
In recent years, more companies have combined the COO and CFO positions. This practice has raised questions as to how effective one person could be at holding both roles simultaneously and how having a CFO in a dual role would affect financial reporting quality.
Steve Buchheit, Ph.D.; Austin Reitenga, Ph.D.; George Ruch, Ph.D.; and Daniel Street, CPA, Ph.D., studied these questions by examining data from organisations that had combined CFO/COO positions, which they referred to as “duality firms”, at any point during the years 2000–2016. Using data about executive characteristics from the BoardEx North America databases and company data from Compustat, they looked at 438 firms and more than 1,000 firm-years with dual CFO/COOs. They matched data from these duality firms with that of comparable firms that had executives in separate COO and CFO roles, which they called “single role firms”, and performed statistical analysis to see how duality and traditional firms differed. Their study showed that duality firms performed as well as single-role firms in terms of operational efficiency and had somewhat better financial reporting quality.
What prompted this idea? What made you want to write about this topic in the first place?
Austin Reitenga: I came up with this idea when I was reading CFO job titles as part of another paper I was working on. I kept coming across CFO/COO. I’d worked for 12 years as an accountant, and that struck me as odd, because in my experience the COO and the CFO would send completely different messages to accounting about accruals. We would typically hear from the COO at the end of the year, saying something like, “We’d really like to hit this earnings target. If you have any accruals squirrelled away, now would be a good time to unload them,” whereas the CFO would tell us to be much more conservative. In the world I lived in, the CFO kind of acted as the filter between the COO and accounting.
In a way I liked the idea of a CFO/COO because when I worked as an accountant, I always felt that accounting was underrepresented in the decision-making process.
What would you say are the most important findings of your study?
Reitenga: We found the companies that tended to have CFO/COOs rather than CFOs and COOs in separate roles were smaller with higher growth and lower profitability. So, they’d look like smaller firms that are still in the growth stage rather than a large, mature firm.
But the CFO/COO is likely to be different than a typical COO, too. They tend to be older. They tend to be more likely to have been a CFO than a COO at some point [before joining their current employer]. They’re less likely to be a CPA or a chartered accountant. They’re more likely to be on the board of directors, though that may partly be because of their position. What that looks like is a highly experienced CFO who’s probably a little more operations-based in their background than the typical CFO.
And then in terms of outcomes, do you damage accounting quality or accrual quality when you give the CFO/COO operating responsibilities? And the answer is no. If anything, accounting accrual quality might even be a little bit better. And can accountants make good business decisions? Our paper suggests that they make just as good a business decision as a traditional COO does.
Steve Buchheit: One thing our analysis suggests is that some aspects of financial reporting are better with duality firms. These dual-role executives predicted future cash flows better.
To test your hypothesis, you performed a statistical analysis. Can you describe what you did in layman’s terms?
Reitenga: As we mentioned, duality firms tend to be growth-stage firms, so they’re different. From a research standpoint, the challenge is that if those firms are different, and we find differences between them and single-role firms, are the differences because of the CFO/COO structure, or is it because the firms are just different? So, we would match a duality firm to a traditional firm that was similar in terms of size, growth, leverage, and profitability. We also matched them on CFO dimensions, so their CFOs had to have similar ages and similar backgrounds.
To measure the effect of duality firms on accounting, we looked at discretionary accruals. And then to measure their effect on operating decisions, we looked at discretionary expenditures. For both of those measures we looked at how deviations from normal discretionary behaviour affected future performance, and used that as a proxy for whether the CFO/COOs were doing a better or a poorer job. We then did our analysis to see if there was a difference between a firm with a CFO/COO versus a firm with both a COO and a CFO.
You found that CFO/COO duality has become more common in recent years and also that it is more widespread than you thought. Why do you think that is?
Buchheit: We’re not exactly sure why it’s happening, but we believe Sarbanes-Oxley played a role. The CFO and the CEO are the only two executives who have to sign off and certify that the financial statements are mirroring operations.
What we were surprised by was the prevalence of this CFO/COO combo. Of all the firms that had a COO, 10% were duality firms.
What can readers take away from your study?
Reitenga: For me, the biggest takeaway is that, at least in the right situation, you can give a CFO operating responsibility and maintain accrual quality or integrity. And then secondary would be the fact that CFOs appear to make operating decisions at as good a level as a traditional COO would.
Buchheit: One thing I think we would want to echo is our paper’s not a call to go out and make your CFO the COO. Certainly, in the case of the executives that we studied, somebody saw something about them that suggested they understood operations. If you think that an executive could handle the role, they probably can. There’s nothing about our evidence that would suggest that’s a bad idea.
Would you recommend that CFOs get more operational training or experience?
Reitenga: I’ve always thought that was a good idea. I worked for a vertically integrated grocery company, and I spent time on loading docks, in warehouses, in manufacturing plants, and in grocery stores. I would actually work in some of these jobs for a day or two just to understand what was really going on. Good accountants already know that the better you really understand the organisation at a nuts-and-bolts level, the better the accountant you are.
Buchheit: Accounting students, I don’t think, internalise the importance of understanding operations like they should. But if they’re looking at a future career, it’s ultra-important.
“Are CFOs Effective Operators? An Empirical Analysis of CFO/COO Duality” appeared in the Journal of Management Accounting Research in summer 2019. Steve Buchheit, Ph.D., is an associate professor of accounting at the University of Alabama. Austin L. Reitenga, Ph.D., is a professor of accounting at the University of Alabama. George Ruch, Ph.D., is an assistant professor of accounting at the University of Denver. Daniel A. Street, CPA, Ph.D., is an assistant professor of accounting at Bucknell University in Lewisburg, Pa.
— Courtney Vien () is an FM magazine senior editor.
Big public companies may have defined the CFO role, but the chief financial officer position is becoming increasingly common in midsize and even small firms. Recent postings for full-time CFOs on job-search sites include an emerging air mobility design and manufacturing company in Massachusetts with fewer than 20 employees and a 94-bed community hospital in Hawaii.
What’s driving that investment in expertise? Often, CEOs who are at a strategic crossroads and recognize the value of an expert financial adviser who can help them grow market share, and their businesses.
In short, smart companies now view the CFO position — both internal and on a virtual or fractional CFO basis — as more of an investment than an expense.
There’s no doubt that a global pandemic made the value of an experienced hand on the finance helm very evident. But our take is that there’s more to the rise of the CFO than an economic crisis. Let’s look at the role, responsibilities and skills finance chiefs need to serve their companies well.
What Is a Chief Financial Officer (CFO)?
A chief financial officer (CFO) is the highest-ranking financial professional in an organization and is responsible for the fiscal health of the business. The CFO’s responsibilities include, but aren’t limited to, building a top-notch finance and accounting team, ensuring revenues and expenses stay in balance, overseeing FP&A (financial planning & analysis) functions, making recommendations on mergers and acquisitions, obtaining funding, working with department heads to analyze financial data and craft budgets, attesting to the accuracy of reports and consulting with boards of directors and the CEO on strategy.
CFOs may also help set technology direction, especially fintech, and make recommendations on everything from supply chain to marketing based on their fiscal insights and industry knowledge.
The most-valued CFOs are visionaries — they have an eye toward the future, work closely with top leadership and aren’t shy about recommending strategic moves.
CEO vs CFO
The chief executive officer (CEO) is a company’s highest-ranking executive. Depending on corporate structure, the CEO may be responsible for all aspects of a company’s operational and fiscal health, or a president may share some duties. The CEO is the official face and voice of the company to press and analysts, the general public and, if applicable, the board of directors.
CFOs are the most senior financial officers in an organization. They report directly to the CEO and work closely with the board of directors.
While the CEO occupies a higher-level position from an org-chart standpoint, in high-functioning companies, the CFO and CEO work closely and collaboratively, with CFOs serving as sounding boards, strategists and risk mitigators.
Financial Controller vs CFO
A financial controller is a CPA (certified public accountant) and often holds an MBA. Financial controllers are responsible for preparing financial reports and analyzing financial data. The financial controller is generally in charge of the accounting function in an organization and reports to the CFO. A controller may be part of a team that includes bookkeepers, accounts receivable/payable clerks, payroll specialists, tax preparers and accountants.
The CFO relies on the reporting generated by accounting and the financial controller to advise the CEO and board on the company's strategic financial direction. The controller and other functional specialists report to the CFO.
Key Takeaways
- What informs the need for a CFO is less company size than a desire for a strategic adviser with deep financial expertise.
- CFOs are captains of a team that covers both accounting and finance and consists of senior leaders, such as controllers and VPs of finance, and operational staff — accountants, bookkeepers, tax specialists, data analysts.
- Serving as a CFO requires a background in accounting or finance and an advanced business degree, generally including an MBA. But it also takes plenty of soft skills.
Chief Financial Officer (CFO) Defined
The chief financial officer (CFOs) holds the top financial position in an organization. They are responsible for tracking cash flow and financial planning and analyzing the company's financial strengths and weaknesses and proposing strategic directions.
CFOs are accountable to both the organization and various regulatory entities and authorities, including the Securities and Exchange Commission (SEC) in publicly held companies. They are well-versed in both generally accepted accounting principles (GAAP) and state and federal regulations, such as the Sarbanes-Oxley Act.
What Does a CFO Do?
The CFO’s role is twofold: Oversee the organization's financial activities, including being responsible for the finance and accounting professionals who perform operational functions, and serve in a strategic advisory role for the CEO and C-suite peers.
Brainyard’s Winter 2021 Survey shows how finance and business leaders rank success factors and how those priorities have changed over time.
Meeting revenue and earnings goals and keeping cash flow stable are clearly in the CFO’s purview. Finance chiefs also advise department heads across the organization, assisting them in both maximizing revenues, if they serve in a revenue-generating capacity, and controlling expenses without sacrificing customer or employee satisfaction or the company’s reputation.
The CFO helps select skilled staff for the finance team and works with departments to allocate budget for human capital management.
CFOs put complex data — current, past and predicted financial results — in perspective and help the CEO make sound financial decisions: Should we introduce this new product or service? Can we afford to on-shore our supply chain? What are the tax implications of our employees working from anywhere?
On a macro level, CFOs are responsible for:
Liquidity
Liquidity refers to an organization's ability to pay off its short-term liabilities — those that will come due in less than a year — with readily accessible, or liquid, funds. Liquidity is usually expressed as a ratio or a percentage of what the company owes against what it owns.
CFOs are concerned with ensuring that customer payments are made in full and on time and controlling expenses so that enough cash is on hand to meet financial obligations.
Return on investment (ROI)
Part of a CFO’s strategic focus is on ensuring a strong return on investment (ROI) for their organizations. ROI is a measure of the likelihood of receiving a return on dollars invested and the precise amount of that return. As a ratio, it looks at the gain or loss of an investment as a percentage of the cost.
Because ROI is a relatively basic KPI that does not account for all variables — net present value, for example — CFOs add context to evaluate whether a project will deliver sufficiently robust ROI to be worth the investment.
Forecasting
Importantly, CFOs don't only report what is — a significant part of their value to an organization is their ability to accurately predict likely future outcomes. That includes financial forecasting and modeling based not only on the company's past performance but on internal and external factors that may affect revenue and expenses. The CFO is tasked with making sense of the various departmental level forecasts to create profit projections for the CEO and shareholders.
Internal factors include sales trends, labor and HR-related costs, the price of raw materials and more, while external data inputs could include opportunity cost for capital, shifts in market demand, emerging competitors and advances in technology.
To monitor the external environment, CFOs may rely on government data, analyst firms and business and general media, supplemented with insights gleaned through trade and association memberships and the input of board members, lenders and others.
Reporting
Financial reports including balance sheets and P&L and cash flow statements help both internal leaders and external stakeholders understand the financial state of the business, and it’s up to the CFO to attest that these statements are accurate and complete in accordance with generally accepted accounting principles (GAAP).
Although private companies are required to file financial reports with the SEC only if they have $10 million or more in assets and 500 or more shareholders, many businesses create these statements anyway so they’re available should the company seek a bank loan or venture capital or equity funding.
Key Duties of the CFO
The key duties of the CFO position vary depending on the size of the organization, its industry and whether it’s a public or private company but generally fall into three broad functional areas: controller, treasury and strategy and forecasting.
Organizations may have professionals overseeing some or all of these roles and reporting to the CFO.
Controller: Controllers run day-to-day accounting and financial operations and often hold a CPA or MBA. They are responsible for creating reports that provide insights into a company's financial standing, including accounts receivable, accounts payable, inventory and payroll.
Treasury: The treasurer is responsible for the company's liquidity, debt and assets. That includes any investments the company may have, whether physical assets, such as buildings and equipment, or financial investments.
Strategy & forecasting: Strategy and forecasting involves using available data and reports, both internal and external, to advise on areas including product development, market expansion, human capital management, M&A and capital investments. It’s also where structured planning and forecasting exercises, like scenario planning and FP&A, fall.
Controllers, treasurers and FP&A analysts are invaluable members of the team, but in all these areas, the buck stops at the CFO’s desk.
Benefits of Having a CFO
CFOs guide the finance and accounting team and have a broad view of an organization's financial health, allowing the CEO as well as peers including the CMO, COO and VPs of HR and sales to focus on their own goals and operational issues. While a CEO or COO may have a background in accounting or finance, they generally don’t possess the same level of technical acumen and experience that a chief financial officer brings to the table.
In addition, a CFO provides:
Leadership skills that enable them to assemble a successful finance and accounting team. CFOs understand at what point a company needs to add, for example, a tax specialist and will define roles and assign responsibilities.
Industry knowledge that enables a company to benchmark itself against peers. There’s a reason B2C often seek to hire CFOs away from competitors, as Netflix did when it hired Activision’s finance chief. Same for manufacturers and healthcare providers. Specialized expertise is key in framing KPIs and metrics for various company types.
Growth experience gleaned from helping previous employers successfully expand, whether organically or via M&A, is invaluable to CEOs, especially those looking to take their companies public. A CFO helps find investment opportunities and use capital wisely.
Risk assessment and management, in terms of regulatory compliance but also the dangers that arise from too much debt and too little liquidity, brittle supply chains, improperly hired contractors and poorly implemented technology.
While hiring an experienced CFO is an investment, the return can be significant.
5 Top CFO Challenges
Today's CFOs face challenges on multiple fronts, even as they benefit from ongoing technological advances and the ability to analyze and forecast based on massive amounts of data. These are the top five challenges challenges facing CFOs:
-
As we've seen, this role is a broad and expanding one. A growing regulatory landscape, rapidly evolving technology and massive market shifts worldwide squeeze CFOs from one side, while difficulty finding and retaining the right accounting and finance talent adds pressure from a time-management POV.
-
All organizations need runway, but maintaining a healthy cash flow is a balancing act. CFOs must manage both incoming revenues and accounts receivables while keeping an eye on outgoing payments and short- and long-term liability. Cash flow analysis is an ongoing endeavor.
-
Like cash flow analysis, scenario analysis is, or should be, an ongoing process. By guiding thorough analysis of the potential impacts of a variety of economic conditions on the organization’s revenues, CFOs can plan for both positive and negative outcomes.
-
Timely reporting has always been critical, but in a fast-paced global business environment, access to information is the foundation of sound, strategic decisions and identifying and avoiding risks. Moreover, the reports issued by the finance team, like P&L statements, can make or break efforts to obtain financing.
-
CFOs are aided in their roles by increasingly sophisticated technology that can help with both reporting and forecasting, including dashboards with built-in business intelligence. But tech represents a significant investment in both capital and human resources.
We're likely to continue seeing these challenges into 2021 as CFOs tackle the pandemic’s lingering effects on sales, consumer demand and the workforce.
Changing (or Evolving) Role of the CFO
Companies that look at the CFO role as more about reporting, less about strategy are or will soon be at a disadvantage. Yes, finance chiefs need to ensure that they and the management team have timely data to support decisions. But strategic planning and collaboration across all parts of the business are what drive success.
Thus it’s no wonder that CFO surveys consistently show that evolution. Especially in small and midsize businesses, CFOs tend to wear many hats. Not only are they doing the traditional CFO job, they're assessing cyber security risks, managing system and data integration, filling talent needs and evaluating new technologies like Blockchain and AI.
When Should You Hire a CFO?
Organizations should consider hiring a CFO when the CEO and more junior financial staff no longer have the skills to adequately evaluate the organization's fiscal standing, assess cash flow, forecast future financial needs and inform business strategy. Some experts advise $10 million in annual revenue as a marker that it’s time to hire a full-time CFO. But don’t forget that part-time/fractional and virtual CFO-as-a-service offerings are available.
While many organizations may wait to create this role until they begin to experience financial challenges, we recommend a more proactive stance. Ask yourself:
Are we beginning to pursue a growth strategy? If so, you’ll need deep insights into P&L, income and cash flow statements. Who will look at the books if you spot an acquisition opportunity? Banks and other potential investors like having a CFO attest to accuracy and completeness. Oh, and have you calculated your valuation multiples lately?
Do we have a sound, repeatable planning and budgeting process? If not, you lack a firm financial foundation. Ad hoc is no way to run a business.
Are we using our data fully, and not just in the obvious areas? For example, are we mining ecommerce data to inform customer success programs? CFOs tend to champion data use.
Do we feel confident in financial reporting requirements? For example, were intangible assets impaired due to the economic downturn? If so, how will you account for that?
Then there are industry-specific considerations. For many manufacturers, retailers and distributors, the pandemic revealed weaknesses in supply chain operations that an experienced CFO can help address.
CFO compensation in public companies is typically a mix of cash and stock. In both public and private businesses, remuneration is based on a number of factors, from company size and industry to geography, experience, seniority and how many finance/accounting divisions or departments report in to the CFO. In 2021, the highest-paid CFO by a wide margin was Goldman Sachs’ Stephen Scherr, at $20.2 million total comp. Among all companies, U.S. CFO pay as of early 2021 averaged $394,235, according to Salary.com data. But at smaller companies, pay hovers between $150,000 and $200,000, according to salary and job sites.
CFO Qualifications & Skills
Serving as a CFO requires a background in accounting or finance and an advanced business degree, generally including an MBA. CFOs must also have experience analyzing data to make recommendations on financial and organizational strategy.
In addition to having "hard skills," including understanding generally accepted accounting principles (GAAP), budgeting and data analysis, today's CFOs need to have solid leadership and management chops — the "soft skills" of effective communication, conflict management and negotiation.
Individuals in this role must forecast and offer strategic direction to the organization based not only on internal data but also on the external environment — regulatory, market and macroeconomic — and be able to advise on industry-specific challenges and opportunities.
Finally, CFOs need a firm grasp of financial technology, or fintech — its ongoing evolution, options available and their applications, how to make financially sound decisions about IT investments and infrastructure and how to communicate to and educate staff to ensure full adoption across the organization — if tech is not used, there goes your ROI.
CFOs & Technology
CFOs and their teams rely on technology to analyze the massive amounts of data available to them. Modern financial management software helps with informed decision-making, freeing up time to focus on strategy and the critical advisory role.
CFOs need core financial reporting, audit and compliance capabilities and should also look for integrated systems that can help in FP&A, treasury and capital structure and allocation, regulatory compliance and corporate portfolio management and modeling.
Today’s CFOs are working long hours — 54% of CFOs in a recent Brainyard survey say they’re working 50 hours or more per week — and juggling a lot of responsibilities. But the return is a fulfilling job where senior financial professionals are able to take advantage of their experience and work closely with CEOs to build not only great companies, but rewarding careers.